Democrats Fear Nearly $1 Billion Shortfall After Gloomy April

With major taxes growing at half the projected rate, is tax cut now in doubt?

Credit: Amanda Brown

David Rosen -- Legislative, Budget, and Finance Officer for the OLS.

Seven weeks ago, Christie administration officials expressed confidence that state revenues would surge this spring, enabling the state to hit its income tax target, exceed its original corporate tax estimate, and prove that New Jersey could afford the 10 percent income tax cut that Gov. Chris Christie was proposing.

Yesterday, the Treasury Department's release of the much-anticipated April revenue figures sent shock waves through the legislature with its acknowledgement that state revenues are running $230.3 million below expectations, with just two months to go in the fiscal year.

Just one day after Christie and Senate President Stephen Sweeney (D-Gloucester) reached apparent agreement on a compromise tax cut proposal, lower-than-expected income and corporate tax collections led legislators to question whether the state should go ahead with any tax cut at all.

"This isn't a mere speed bump," Senate Budget Committee Chairman Paul Sarlo (D-Bergen) said after discovering that state revenue collections actually declined over the previous April, which is the most important revenue month of the year because it includes state income tax returns for the previous year.

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"While I would like to share in the administration's unbridled optimism, as it does make for great sound bites, these numbers paint a picture that our economy still has far to go," Sarlo said, adding that the Treasury report shows that rather than being on the road to the "New Jersey Comeback" that Christie is claiming, "we've found ourselves stuck in the mud somewhere in the swamps of Jersey."

Like Assembly Majority Leader Lou Greenwald (D-Camden) did the day before, Sarlo said the new revenue numbers could translate into a total $1 billion shortfall over the next 14 months. This estimate is based on earlier projections by David Rosen, budget director for the non-partisan Office of Legislative Services, that the Christie administration's revenue projections for the current and upcoming fiscal year were already inflated by $537 million.

Christie spokesman Kevin Roberts warned in an email to reporters that "the urge to hastily generalize a single month's report over the remainder of the year would paint an incomplete picture at best. Broader economic indicators continue to point to an upward trend in long-term economic activity and growth for New Jersey, including strong wage figures."

But Rosen, the OLS budget director who was attacked by Christie for projecting that state tax collections would come in $145 million lower for the current fiscal year and $392 million lower next year, said the shortfall was clearly serious.

"Through the end of April, the major tax revenues are growing at approximately half the rate necessary to reach the Executive's budgeted target of 4.8 percent growth in the current fiscal year," Rosen warned. "In particular, gross income tax and corporation tax revenues declined compared to last year during the crucial April tax payment period."

The problem is not only that the fiscal year ends June 30, but also that Treasurer Andrew Sidamon-Eristoff projected a surge in growth from March through June would rescue his original budget projections, and both the March and April numbers have now come in below expectations.

Rosen said the drop in the corporate business tax, which is notoriously volatile and hard to predict, was the biggest shock. Corporate business taxes came in at $463 million in April -- which was $84 million less than the $547 million collected the year before. That put corporate business tax collections for the first 10 months of the year at $1.786 billion, down $141 million from the $1.927 billion that Treasury expected to collect at this point.

Surprisingly, personal income tax collections also declined in April from $1.751 billion in April 2011 to $1.731 billion for April 2012. Overall, the Treasury report said income taxes were running $50.3 million below Sidamon-Eristoff's projection for the month, putting income tax collections to date $86.3 million below estimates.

However, Rosen noted that income tax collections of $8.55 billion through April "are only 2.0 percent above the same period last year, and less than half the Executive's revised year-end target growth rate of 4.9 percent" -- and that it would be highly unlikely that income tax growth in May and June would be able to reach the $11.13 billion target.

Disagreement over income tax projections accounted for $464 million of Rosen's $537 million dispute with Sidamon-Eristoff's revenue projections for the current and upcoming fiscal years at the March 28 Senate Budget Committee hearing. It will likely be the main point of difference when they return to Sarlo's committee next Wednesday to provide revised revenue numbers in the wake of the April tax collection reports.

If income tax revenues continued to come in at just 2.0 percent above last year, the state would be facing a $300 million shortfall in the income tax alone by the end of the year and as much as a $500 million gap in the current year budget. The problem for both the Christie administration and the legislature is that they will have to adopt a final budget for Fiscal Year 2013 -- including any tax cut -- by the statutory deadline of June 30, which is before they will know what the June tax numbers are.

The Christie administration has a healthy $588 million surplus in the year's budget -- almost 2 percent of total state revenue -- so any current-year shortfall could be handled as part of an adjusted budget for next year.

But there are two problems. First, Christie's budget for next year has already diverted $288 million of that surplus as a "one-shot" nonrecurring revenue to fund programs in the FY 2013 budget, leaving a minimal $300 million surplus that represents less than 1 percent of next year's projected revenue and is considered dangerously low by the independent bonding agencies. Thus, any part of this year's $588 million surplus that is used to cover a current year revenue shortfall will have to be made up with program cuts next year.

Second, any shortfall in current year tax revenues is really a "double hit," because a $200 million reduction in income tax revenue for the current fiscal year, for example, would generally require a similar $200 million reduction in projected income tax revenue for the coming year.

Here's why: The Christie administration is already projecting a 6.3 percent increase in income tax revenue from $11.132 billion this year to $11.837 billion next year -- which is really an 8.4 percent increase because it includes taking out $197 million of additional income tax revenue that would be coming in if not for the planned first stage of Christie's proposed income tax cut.

If income tax collections in the current year totaled $200 million less -- or $10.932 billion, it would take an 8.1 percent increase in net income tax revenue -- or the equivalent of a 10.2 percent increase once the tax cut is factored in, to reach that $11.837 billion revenue. With income tax revenue already coming in below much more modest growth projections for the current year, the Christie administration would not be willing to project even higher income tax growth than the figures that they have already been criticized for by Standard & Poor's and by Moody's bond-rating houses. The standard budgeting practice would be to reduce next year's income tax projections by about the size of the current year's revenue shortfall.

The same reasoning would apply to the 11.3 percent growth in corporate tax revenue to $2.57 billion projected by Sidamon-Eristoff for next year if corporate tax revenues fail to improve or decline further.

Dr. Charles Steindel, the Treasury Department's chief economist, downplayed the importance of the drop in April tax collections over the previous year.

"While April's revenues were somewhat below expectations, reliable indicators show that New Jersey's economy continues to grow," Steindel said. "Economic growth has brought in more revenue for the state in Fiscal Year 2012 than in 2011, which is a good sign for the future."

However, Gordon MacInnes, a former Democratic state senator and Education Department official who heads the liberal New Jersey Policy Perspective think tank, declared that "today's revenue numbers document what we've been saying all along: This is no time to be cutting taxes.

"New Jersey already has the third-lowest credit rating in the country, greatly increasing our borrowing costs," MacInnes noted. "Our leaders should concentrate first on putting the state's fiscal house in order, not on politically appealing, but reckless, proposals to cut taxes. This is exactly how we got into this mess."

Greenwald, Assembly Speaker Sheila Oliver (D-Essex) and Assembly Budget Committee Chair Vincent Prieto (D-Hudson) all issued statements criticizing Christie's economic leadership and his original call for an income tax cut that would disproportionately benefit the wealthy.

Despite the disappointing revenue numbers, they reaffirmed their commitment to the Assembly's tax cut plan which would provide property tax credits on income taxes of up to $2,500 for senior citizens and $2,000 for those earning up to $250,000, partly through a phased-in program that taps up to $1.4 billion in future revenue growth by Fiscal Year 2016 and also imposes a new 10.75 percent top income tax bracket on millionaires.

Greenwald said he will introduce his plan as legislation in the upcoming weeks, even though Christie has previously vetoed "millionaire's tax" proposals twice and has vowed to do it again. He said he would be willing to listen to Sweeney's pitch to join the Senate president and Christie on a compromise plan that would provide a property tax credit on income taxes of up to $1,000 for those earning up to $400,000. But for now, Greenwald and Assembly Democratic leaders remain committed to their own ambitious proposal.

Assemblyman John McKeon (D-Essex), however, said yesterday that "while I will reserve judgment until the final terms of the reported compromise are announced, I am supportive of the tentative deal being discussed by Senate Democrats and the governor . . . By proposing a cut of 10 percent for the first $10,000 of property taxes for households with incomes up to $400,000, relief would be delivered where it is needed most -- to New Jersey's property taxpayers."

McKeon, who is on the outs with Oliver and the current Assembly Democratic leadership, couched his endorsement by saying that "restoring the 'millionaire's tax' is a necessary component to shared sacrifice," but added that the debate over the millionaire's tax should take a back seat to putting a property tax cut in place before July 1.